Mortgage rates hit record low: 30-year fixed nears 4%

By Les ChristieSeptember 15, 2011: 5:45 PM ET

NEW YORK (CNNMoney) -- Mortgage rates hit yet another record low this week amid ongoing economic concerns both at home and in Europe.

The average rate for a 30-year, fixed-rate loan fell to 4.09% this week, its lowest level in 60 years, according to mortgage giant Freddie Mac. Last week, the 30-year fixed averaged 4.12%. The average rate for a 15-year fixed mortgage -- a popular option among those who wish to refinance -- sunk to 3.30%, down from 3.33% last week, Freddie reported.

"Continued investor concerns over the state of the European debt markets kept U.S. Treasury bond yields low and allowed mortgage rates to ease once more this week," said Frank Nothaft, vice president and chief economist, Freddie Mac in a statement.

The low rates have done little to boost the beleaguered housing market, however. While mortgage applications increased 6.3% last week, only 23% of applicants intended to use the loan to buy a home, according to a weekly mortgage survey from the Mortgage Bankers Association. The remainder of applicants werehomeowners seeking to refinance existing, higher-rate mortgages.

There are more than 8 million homeowners with mortgage issued through Fannie Mae and Freddie Mac who have loans carrying interest rates of 6% or more, according to the Federal Housing Finance Agency.

The average interest rate of mortgages outstanding in the second quarter was 5.28 percent, according to Freddie Mac's Nothaft. By refinancing into today's 30-year fixed mortgage, homeowners with a $200,000 loan could shave almost $1,715 a year in interest payments.

However, not every homeowner or buyer would qualify. Many lenders require borrowers to have stellar credit and large down payments before they will give them mortgages with favorable rates.

Will rates continue to drop?

The latest decline in mortgage rates marks the second week in a row that mortgage rates have fallen, according to Freddie.

"It would be hard to continue to forecast record lows week after week," said Keith Gumbinger of HSH Associates, a publisher of mortgage information. "But there is some expectation that the Federal Reserve will pull something out of its hat next week to make interest rates go down."

In August, the Fed promised to keep interest rates low through at least mid-2013.

Treasury yields, however, rose this week from near 1.9% on Monday for a 30-year to 2.09% Thursday.

According to Greg McBride, senior financial analyst for Bankrate.com, 30-year fixed-rate loans and 10-year Treasury yields usually rise and fall in tandem, with mortgage rates normally about 1.6 percentage points to 1.8 percentage points typically higher than yields. That difference represents the premium investors demand as compensation for taking on the extra risk of mortgage-backed securities, he explained.

These days, however, the spread is closer to 2 percentage points. So if that decreases to normal levels, interest rates would fall further.

McBride, however, does not see the spread shrinking for the time being. Economic conditions are in such turmoil that investors are putting a higher value on the risk premium, which means mortgage-backed securities must offer higher returns than during more stable eras.